Wholesale inflation hits 39-month high as fuel shock from West Asia crisis ripples through economy

Nepal's wholesale inflation has surged to its highest point in 39 months, reaching 8.47 percent in mid-June. This sharp increase, up from 1.56 percent a year prior, is largely attributed to soaring energy prices stemming from the West Asia crisis. The Nepal Rastra Bank reported that energy prices alone jumped by 48.14 percent, consequently pushing up wholesale prices for manufactured goods by 10.97 percent.

The central bank also noted shifts in other categories: wholesale prices for consumption goods saw a year-on-year decline of 1 percent, while intermediate goods, crucial for producing other products, rose by 14.64 percent, and capital goods increased by 4.78 percent. Wholesale inflation serves as an early indicator of future retail price changes, as it reflects the costs businesses incur before goods reach consumers.

Gunaraj Bhatta, a director at the central bank, warned that this building inflationary pressure is likely to be passed on to consumers. The extent to which this occurs depends on market competition and product type, as producers and traders may absorb some of the increased costs. The conflict in West Asia, which began with a U.S. and Israeli military assault on Iran on February 28, triggered a sharp rise in global oil prices. Within three months, petrol prices in Nepal climbed from Rs156 to Rs219 per liter, diesel from Rs139 to Rs237, and LPG cylinders increased from Rs1,910 to Rs2,160.

These higher fuel prices directly impacted transportation costs, increasing production and distribution expenses across the economy. Although domestic fuel prices have since seen a slight reduction following a decrease in global crude oil prices, petrol now at Rs197, diesel at Rs195, and LPG at Rs2,060 per cylinder, the initial shock has had a ripple effect. Wholesale prices for non-food products climbed 25.44 percent, affecting categories like alcoholic beverages, tobacco, clothing, housing, and utilities. Manufactured goods also saw significant price hikes, with textiles up 7.77 percent, chemicals 14.75 percent, and basic metals 32.20 percent.

Economists point to Nepal's weak market regulation as a key factor enabling businesses to rapidly increase prices when costs rise. Practices such as syndicates and cartels further exacerbate this issue, limiting competition and allowing for swift price adjustments. Consumer price inflation stood at 5.22 percent in mid-June, compared to 2.72 percent a year earlier, with food and beverage inflation at 4.95 percent and non-food and services inflation at 5.37 percent.

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The rise in wholesale inflation indicates that inflationary pressure is building and is likely to be passed on to consumers for some time.